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November 13, 2013

Sonders: ‘Animal Spirits’ May Get Banks to Start Lending Again

Schwab’s Liz Ann Sonders suggests local competition among banks may help narrow gap between high bank deposits and low bank lending

Liz Ann Sonders speaking at Schwab Impact last year.

In her preconference session Sunday night at the Schwab Impact conference in Washington, Liz Ann Sonders displayed a telling slide showing the widening gap among U.S. banks between their high levels of deposits, which have been “soaring, thanks to the Fed,” and their stubbornly low levels of actually making loans.

So what will lead banks to start lending?

In an interview the following day, Schwab's chief investment strategist suggested that it may turn out that “animal spirits will shake the banks loose.” She argued that banks are already in “pretty loose territory,” and that “if your competitors are lending you’ll start lending.” She said that overall, the banks were “in great shape,” there there was “plenty of pent-up demand,” and that the rules were “not yet written” on Dodd-Frank implementation of stricter bank regulation.

She also indicated that home prices would “probably boom” in the fourth quarter of 2013, though she didn’t specifically tie that rise to any forecast of increased bank lending. However, if the banks do start lending, that could be the “next positive surprise” for the markets and economy. She tempered that optimism with a caveat, saying it “could be problematic” if velocity picks up, which could then “run the risk of inflation.”

Responding to another question (sent to this writer from a social media follower) on whether corporate profits could continue to rise, she said that the third quarter of 2012 was the trough in earnings growth. She expects corporate earnings growth of 6% this year, and an increase to 10% next year. “Profit margins will peak higher than many think,” she said, adding that the S&P 500 overwhelmingly tends to do well on those margin peaks.

So why are some people starting to worry about another market bubble? Sonders believes fears of a bubble are backed much more by behavior than by the fundamental numbers on the economy and markets. She reiterated her belief that a market correction in the mid-single digits would be good for the markets, since it would “help keep euphoria in check” and allow the more steady, if less than spectacular, markets and economy to “grind forward.”